Fourth Circuit Decision Highlights Risk of Personal Liability for Copyright Infringement
A company gets hit with a lawsuit for copyright infringement and loses. If the owner is later sued personally, will she get another shot at her defense? Maybe not.
In 2010, the Fourth Circuit issued a major copyright decision holding that a decorative furniture design was subject to copyright protection and affirming an $11 million judgment in favor of the plaintiff, Universal Furniture International. The defendant, Collezione Europa USA, was “in the ‘knock-off’ furniture business,” making furniture that imitated copyrighted designs at a cheaper price. The first lawsuit resolved that Universal had valid and enforceable copyrights, that Collezione had infringed them, and that Collezione owed millions in damages. It also held Collezione liable under the Lanham Act and the North Carolina Unfair and Deceptive Trade Practices Act for passing off Universal furniture as its own at a major trade show. Before Universal could satisfy its judgment, Collezione filed for bankruptcy.
So what did Universal do then? It filed suit directly against Leonard and Paul Frankel, the brothers who owned and managed Collezione. Universal did not attempt to pierce the corporate veil. Instead, it sought to hold the brothers personally liable, either vicariously for the torts of the company or directly for their own involvement.
The first brother defaulted, but Paul contested liability. Universal moved for summary judgment, arguing that all findings of fact and conclusions of law in the first proceeding against Collezione were binding on Paul. The district court granted summary judgment in favor of Universal on liability, relying on the preclusive effect of the findings against Collezione. In other words, though Paul was not a defendant in the original suit, he incurred potentially millions in personal liability without ever going to trial. The parties settled the question of damages for $1.87 million , but Paul reserved his right to appeal the liability ruling.
In an unpublished decision, a panel of the Fourth Circuit that included retired U.S. Supreme Court Justice Sandra Day O’Connor affirmed.
The Fourth Circuit agreed that Paul was vicariously liable for Collezione’s infringement. Even though Paul sought to blame the actions of the knock-off furniture business on his brother Leonard, the Court held that Paul, who admitted involvement in the operations and financial side of the business, could be held vicariously liable for infringement because he had both (1) “the ability to supervise the infringing distribution” and (2) “an obvious financial interest in the exploitation of the copyrighted furniture.” The Fourth Circuit also held that Paul was directly liable for “reverse passing off” claims under the Lanham Act and the North Carolina Unfair and Deceptive Trade Practices Act. Relying on facts established against Collezione, the Court concluded that Paul either knew or should have known of Collezione’s infringement, or was at least willfully blind to its misdoings.
The Fourth Circuit rejected Paul’s argument that it was unfair to saddle him with the judgment without an opportunity to put on his own defense, relying on a form of issue preclusion called “offensive, non-mutual, collateral estoppel.” In layman’s terms, the Court concluded that Paul had every incentive to contest the copyright validity and infringement issues resolved in the first case, that he had a full and fair opportunity to do so and was in fact involved in the underlying defense, and that he had not identified anything he would have done differently. The result? $1.87 million in personal liability.
In most cases of corporate copyright liability, the judgment is paid by the company and an individual like Paul does not end up on the hook. But this case holds an important warning for any principal of a company defending against a copyright infringement judgment–or indeed any tort: Defend the lawsuit like you were named personally, particularly if there is a risk that the company could become insolvent upon a loss. Depending on the facts, a principal closely involved in the operation of the company could be held personally liable without another bite at the apple.